Italian leadership strikes out

Italy’s government of technocrats is under intense pressure to confront workers involved in a wave of strikes after financial markets drove the cost of state borrowing to crisis levels and confidence in the European Union’s plan to fix the euro crisis began to evaporate.

The Italian Prime Minister,
Mario Monti
, said negotiations on Sunday had failed to resolve differences over how to implement €20 billion ($26.16 billion) worth of spending cuts and tax rises, triggering the strikes by all three of the country’s union federations.

The benchmark 10-year Italian bond yield surged to 6.79 per cent as investors voiced their concerns over Rome’s ability to push through austerity measures without greater support from the rest of the euro zone and the European Central Bank.

A level of 7 per cent is seen as unsustainable for a country with Italy’s massive debts.

Last week’s Brussels summit agreed to press ahead with consolidating fiscal policies to ensure all member states met agreed upon borrowing and spending limits.

But credit-ratings agency Moody’s said the summit offered “few new measures" to deal with the euro zone’s sovereign debt crisis.

“The absence of measures to stabilise the credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area [remains] under continued threat," Moody’s said in a statement.

Standard & Poor’s is expected to strip France of its AAA rating within days following a review that found the country’s leading banks had made large loans to Italy, Spain, Greece and Ireland.

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French President
Nicolas Sarkozy
said that if France lost its AAA credit rating, it would be “one more difficulty, but not insurmountable".

“If they withdrew it, we would face the situation with sang-froid and calm," he told Le Monde newspaper.

Speculation that Germany’s second­-largest bank, Commerzbank, is under financial pressure following a lending spree to indebted countries was also circulating among traders. The bank is expected to need a rescue bailout by the Berlin authorities to prevent its collapse.

Gerard Lyons, chief economist at Standard Chartered bank and one of the most accurate forecasters in the City, warned that the euro zone would contract next year by 1.5 per cent, while the United Kingdom would shrink by 1.3 per cent.

Mr Lyons said that “the mounting crisis" in advanced economies, especially the euro zone, meant the outlook was increasingly gloomy.

Spain’s new right-wing government was also under pressure after Spanish bond yields began to climb. Bond yields reflect the cost of borrowing for nations and corporations.

In the case of Spain and Italy, they have climbed sharply since June ahead of an escalating Greek crisis.